THE ARMENIAN BANKING SECTOR HAS PROVED RESILIENT TO THE CRISIS, SAYS THE INTERNATIONAL MONETARY FUND’S THIRD REVIEW UNDER THE STAND-BY ARRANGEMENT.

ArmInfo
22.04.2010

ArmInfo. Substantial capital and liquidity buffers, due in part to
low leverage ratios, have enabled the banking sector to absorb shocks.

Despite a significant increase in Non-Performing Loans (NPLs)
and considerable losses from the dram depreciation last March, the
aggregate capital adequacy ratio remained strong at 28.3 percent at
end-2009, more than double the prudential minimum of 12 percent. As
of end-December 2009, only 3 of the sector’s 22 banks had capital
ratios below 20 percent. Liquidity ratios remained well above minimum
prudential requirements throughout the year. On top of an effective
supervision framework, the authorities have implemented measures
to help contain the negative impact of the crisis. For example,
they have strengthened the financial safety nets (lender of last
resort facility and deposit insurance scheme), tightened prudential
regulations (reinstating foreign currency exposure limits), and
encouraged capital injections to provide increased cushion through
its subordinated debt facility.

Banking sector balance sheets have improved since September 2009.

After a marked deterioration during the first 8 months of 2009, NPLs
under both the CBA and the IMF definitions have fallen to 7 percent
in January 2010. Profitability improved, but remains low. Profits
turned positive in September 2009 for the first time since March
2009, although the ROA and ROE at end-2009 were 0.75 and 3.4 percent
respectively, still significantly less than the figures of 3.1 and
13.6 percent at end-2008.

Latest stress test results indicate that banks are able to withstand a
variety of shocks, thanks to the relatively high capitalization. The
large capital cushion allows most banks to absorb losses and remain
adequately capitalized even under extreme credit shock scenarios.

Under all scenarios except for combined shocks, the CAR would decline
by no more than 4 percentage points for the system as a whole. A few
banks, however, appear to be more vulnerable than others to various
risks, due to their relatively low capitalization level. However,
the risks are contained and low, as capital injections appear to
be readily available for these banks. The CBA is closely monitoring
these cases. However, continued vigilance is still needed as risks to
balance sheets from indirect foreign currency exposure remain. Since
March 2009, deposit and loan dollarization have stabilized at around
70 and 50 percent, respectively. Exposure to unhedged borrowers
represents a main source of vulnerability in the banking sector,
especially in light of increased exchange rate flexibility. The CBA is
in the process of strengthening prudential regulations to specifically
address indirect FX risks by increasing provisioning requirements and
risk weights in capital requirements for foreign currency loans. This
will also provide the CBA with adequate information on the extent of
unhedged lending by banks to enhance supervisory monitoring.

The high capital or low leverage in the banking sector is a source of
resilience, but it has led to high interest rate spreads and hampered
financial deepening. By regional standards, financial intermediation in
Armenia is relatively low, with bank loans-to-GDP ratio at 22 percent
in 2009, up from 17 percent in 2008 largely as a result of GDP decline.